5.2.1 The situation of minority shareholders in China before 2006

As explained, one of the main reasons that the Company Law 1993 was enacted was to reform the state owned enterprises.1 By protecting state interests in such companies, the corporate governance model in China was labelled as shareholder supremacy, and to be exact, it was the supremacy of majority shareholders because little protection was given to the interests of minority shareholders.2

Severe problems of abuse of majority power existed. In public companies, it was common practice that the controlling shareholders used their power to oppress the minority.3 Cases range from nationwide, infamous ones, like Qiong Min Yuan, Hong Guang Shi Ye, Zheng Bai Wen, Wu Liang Ye, Da Qing Lian Yi, to those less serious but more frequently occurring.4 Faced with abuse of power, the minority shareholders were always the victims, as company law had conferred upon them rights but inadequate accompanying remedies to enforce these rights.

Things were even worse in close companies. The plight suffered by minority shareholders in close companies in the UK and US was also familiar to minority shareholders in close companies in China. For example, the majority shareholder controlled the company and did not vote for a distribution for a long time. Minority shareholders did not get any dividends, and in the absence of a employment contract with the company, this meant that the minority shareholders would receive zero return on their investment. On the other hand, because majority shareholders controlled the business, they could benefit from handsome directorship payments and/or other advantages. There was no mechanism in Company Law 1993 to remedy this situation for the minority shareholders. They had no right to ask for a compulsory distribution; no right to review the accounts; it was difficult to transfer the shares to a third party onder this circumstance; there were no right to leave the company; nor did a was there any no right for a minority shareholder to require the dissolution of the company. If the minority shareholders in China chose to bring a claim which was not based on a remedy provided by the company law, the court would probably decide not to accept the case.5

In sum, for a long time, the situations of minority shareholders in China were extremely daunting, in both public and close companies. It is therefore no exaggeration to say that the interests of minority shareholders in China were driven to the edge,6 and it was time to provide stronger protection for minority shareholders. Considerable efforts have been made in Company Law 2006 to strengthen the protection of the minority shareholders, including ex-ante mechanisms and ex-post remedies. We will take a brief look at their development in the following part.